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Through the Ages

Dennis Friedman

WHEN I WAS IN MY 20s, I was lucky to work for a company that offered a pension plan—and that put me on the road to retirement. Today, unfortunately, company pensions are rare. How can you ensure a comfortable retirement? Try shooting for these age-related milestones:

Age 25. Start saving at least 15% of your gross income. As I mentioned in an earlier article, a Fidelity Investments study found that if you save 15% of your gross income every year from age 25 through 67, and you also receive Social Security, that should ensure you have enough to maintain your current standard of living once you retire.

Age 30. By this point, aim to have amassed retirement savings equal to at least one times your gross income, or so suggests guidelines from Fidelity. Invest that money in low-cost, broad-based index funds. These funds take away one of the biggest investment risks—underperforming the market averages.

Age 40. This might be a good time to purchase umbrella insurance, which can provide additional liability coverage, on top of what’s offered by your auto and homeowner’s policies. Umbrella insurance also covers incidents your homeowner’s insurance doesn’t, such as slander and defamation lawsuits.

Think of your umbrella policy as asset protection for your growing wealth. By this point, aim to have retirement savings equal to at least three times your salary.

Age 50. If you’re lagging behind your retirement savings goal, you can start making catchup contributions to retirement accounts. Under the catchup rules, those age 50 and older can contribute an additional $6,500 each year to a 401(k) and $1,000 to an IRA. How do you know if you’re on track for retirement? By age 50, you’d want to have at least six times your gross income set aside for retirement.

Age 59½. If you need to tap your retirement accounts, this is the age at which you can start taking penalty-free withdrawals from your IRA or an old 401(k).

Age 60. According to AARP, the best time to buy a long-term-care (LTC) policy, assuming you’re healthy and eligible for coverage, is between ages 60 and 65. At this juncture, the monthly premiums should still be affordable. If you have ample retirement savings, you might drop your disability and term-life insurance coverage, and then redirect those premium dollars to an LTC policy.

An estimated 70% of Americans who reach age 65 will need long-term care at some point during their remaining years, though the need for care is often relatively brief. Some seniors receive help from family members and friends. Still, roughly 50% will need some paid caregiving services. According to Genworth’s 2021 Cost of Care Survey, a private room in a nursing home costs an average $297 a day, or $9,034 per month.

Fidelity suggests that, as of age 60, retirement savers should have at least eight times their gross income socked away. Falling short? You might plan on downsizing or, alternatively, staying in the workforce for longer or working part-time in retirement.

Age 65. You can apply for Medicare, starting three months before your 65th birthday. You might enroll in federally run Medicare or opt for Medicare Advantage, the private insurance alternative.

If you’re enrolling in traditional Medicare and will need to change doctors, don’t wait until you receive your Medicare card before scheduling an appointment. Because of the shortage of primary care physicians, you should make an appointment while your Medicare application is being approved. You can schedule your doctor’s appointment for after your Medicare start date, and then provide them with your Medicare number prior to your appointment. Otherwise, you might have to wait months to see your new doctor. This is especially important if you’re on medication or need a medical procedure.

You should also keep in mind that you can’t get a Medigap policy or enroll in a prescription drug plan until you have your Medicare number. After my Medicare application was approved, it took me two additional weeks to get approval for these two plans.

Age 67. For Social Security purposes, this is the full retirement age for those born in 1960 and later. By now, if you have at least 10 times your gross income saved, your nest egg—coupled with Social Security—should allow you to maintain your current lifestyle if you opt to retire.

Age 70. If you haven’t yet, now’s the time to apply for Social Security. Only 7% of men and 8% of women wait until age 70. But if you can afford to wait, you’ll receive an inflation-adjusted amount equal to some 77% more than the benefit you would have got at age 62, the earliest possible age to claim Social Security.

That larger check reduces the risk that you’ll reach the end of your life with a depleted portfolio and not enough income to cover your expenses. It’ll also give you more confidence to spend freely, something many retirees are afraid to do in their golden years.

Overall, Social Security is the best income annuity on offer. Unlike annuities sold by insurance companies, Social Security offers inflation protection, it’s taxed less heavily and there’s less credit risk.

What if you’re looking for additional income? An immediate fixed annuity might be right for you. Some financial advisors recommend waiting until your 70s to purchase one, so you get a larger payout. The payout is based on your life expectancy at the time of purchase. The older you are, the more income you’ll get.

By waiting, it also gives you a chance to see how your health holds up through your early retirement years. If your health is failing, you might decide it’s not for you. You could also find you’re spending less than you planned in retirement and thus you don’t need the extra income.

Age 72. Start taking required minimum distributions (RMDs) from your retirement accounts no later than April 1 of the year after you reach age 72. If you fail to take your RMD on time, you could be penalized 50% of the required amount not withdrawn. One exception: RMDs aren’t required from Roth IRAs.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.

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TechnoPeasantx
TechnoPeasantx
2 months ago

In the spirit of the article’s timeline concept here’s a review of the tools commonly used to determine retirement readiness in age order from younger to older. Or least to most accurate. YMMV☺

1.     Rules Of Thumb. These are wildly inaccurate and should only be used when there are multiple decades to go.
a)    25 times current expenses aka the 4% rule
b)    80% of current income.
 
The problem with both is that, except for maybe SS, no one knows what their income will be in 20,30 or 40 years. And the only certainty about future expenses is they will be drastically different or completely eliminated. Specifically taxes especially payroll, saving for retirement, paying a mortgage, saving for college, paying for healthcare and un-reimbursed work-related items like two cars and clothes.
 
2.     Linear Projection. Uses straight-line fixed values for inflation and rates of return. The world doesn’t work this way but it’s a simple-to-use Excel function. More useful with more than 20 years to go before retiring.
 
3.     Gaussian Distributions aka Monte Carlo analysis. Assumes fixed rates for returns, expenses and inflation. Provides a wide range of outcomes from mega-millionaire to flat broke. Estimates probability of success as % of times portfolio goes to zero. Disregards trends, momentum and the fact the portfolio may be too small to live on LONG before going to zero. Using a 15% standard deviation for volatility aim for 80% or better chance of success. More useful with 10-yrs or less to go.
 
4.     Historical Backtest or Aft-Cast. Uses actual market performance and inflation rates for rolling 1-year time periods going back 100+ years. The shortcomings are the world, regulations, investment products and markets have changed radically over the just the past 30 years and there are only three 30-yr time frames between 1932 and 2022. Aim for 100% chance of success in all 1-year periods. See Jim Otar
 
5.     Funded Ratios. These apply net-present-value calculations to a current snapshot of income, expenses and assets. Computes ratios of expected future income over expenses. Uses fixed assumptions for discount , tax and inflation rates. Aim for a ratio of 110% or higher with 5 years to go. See SimplyMoney.com or Mclean asset management.
 
6.     Cash Flow Projection. The most accurate method but cannot be used until actual income and expenses for first year of retirement are known +-10%. Can be used directly to create a retirement income plan aka paychecks. Works regardless of investor profile (safety-first or probabilistic) or investing strategy such as total return (selling shares) or taking income only from rents, SS, pensions, interest, dividends and normal distribution(no selling shares) At age 72 debt coverage ratio from reliable sources of income should be 50% or higher because by then taxes, social security, RMD’s and legacy issues are well understood.

Randy Starks
Randy Starks
2 months ago

If you can wait, health-wise and monetarily, it is best to wait until you are 70; especially if you have a younger spouse who will benefit if you earned more in your lifetime. Love his statement: “Overall, Social Security is the best income annuity on offer. Unlike annuities sold by insurance companies, Social Security offers inflation protection, it’s taxed less heavily and there’s less credit risk.” 100% true.

Donny Hrubes
Donny Hrubes
1 month ago
Reply to  Randy Starks

YES, I have the ‘you better apply now’ letter from SocSec as I was 70. I’m going to frame it. I have several income streams and this one is the greatest amount, and will be raised handsomely in 2023.
Thank you U.S.A. government!

Purple Rain
Purple Rain
2 months ago

Both my perfectly healthy parents died within 6 months of each other at 60 (my dad a week before his 60th birthday) of sudden heart attacks. I am taking SS the day I turn 62 and investing the money in dividend growth stocks, no matter what financial advisors say.

If dividends grow at around 8% a year (as my current dividends do), there is no advantage for me in waiting to take SS.

Last edited 2 months ago by Purple Rain
Brent Wilson
Brent Wilson
2 months ago
Reply to  Purple Rain

It seems a total return of 8% on these stocks is what’s important, factoring in both dividend and stock price appreciation. That growth is certainly possible with stocks, but not a guarantee like Social Security’s when you delay claiming every year until 70.

But your decision still makes sense to me. If both my parents died at such young ages, I would do the same thing.

Purple Rain
Purple Rain
2 months ago
Reply to  Brent Wilson

Agree. Total returns matter. However, once I buy I never sell. I am laser focused on dividend income and growth. I don’t reach for yield (my total portfolio yields 2.3% and the dividends currently grow at 9-10% a year).

Last edited 2 months ago by Purple Rain
Randy Starks
Randy Starks
2 months ago
Reply to  Brent Wilson

It really depends on your lifestyle and health. Medical care is better today than when my parents grew up in the depression, hands-down! In addition, if you are still working and earning a living. Do not take SS at age 62 IMO at least wait until your full FRA.

Donny Hrubes
Donny Hrubes
1 month ago
Reply to  Randy Starks

I do 30 jumping jacks every morning and yoga moves… Jus’ sayin’

steveark
steveark
2 months ago

Great advice as always! I was kind of shocked that less than 10% of people wait until 72 to claim Social Security benefits. It was a no brainer for me because I see it as an insurance policy against one of us living an extremely long life. We do not need it for income now so we planned to build it to the maximum since it never expires, until we do.

Nate Allen
Nate Allen
2 months ago
Reply to  steveark

I was kind of shocked that less than 10% of people wait until 72 to claim Social Security benefits.

Just a quick correction that it is 70, not 72.

I am sure it was just a typo, but there was an article the other day on the different ages that things happen and I didn’t want anyone inadvertently confused.

OldITGuy
OldITGuy
2 months ago
Reply to  steveark

I had planned to do the same thing until I learned that my wife isn’t eligible for my social security benefits because she has her own state government pension. The GPO law (in our case) completely prevents her from getting any survivor benefit from my social security, although strangely it doesn’t prevent her ex-husband from getting a big chunk of her local government pension while not impacting his social security. Anyway, since she’d accrue no benefit from my waiting, I decided to take my social security when I retired at 65.

Russell D'ITALIA
Russell D'ITALIA
2 months ago

I keep getting older faster than writers can catch up. Now the author has gone up to 72, but alas those of us at 77 or older are left trying to push mutual funds around to find some ideal diversity (as preached by Vanguard and others) as well as trying to simplify a lifetime of decisions. At some point I will get down to 50% total bonds and 50% total stock (oh, my! not 30% in international currency hedged bonds!) and let my heirs figure out the rest.

Brent Wilson
Brent Wilson
2 months ago

Good advice. I think rules of thumb like Fidelity’s savings milestones can be helpful for younger savers to get and stay on the right track. As one approaches retirement, shifting to an evaluation of current/expected expenses is probably a better bet. I wouldn’t rely solely on a rule of thumb at this point, but the 25x Expenses Rule comes to mind.

Paula Karabelias
Paula Karabelias
2 months ago

Excellent article. I disagree about waiting until 40 for an umbrella policy if your assets are high enough before then.

Also , try to get your new PCP before you apply for Medicare for two reasons. First , many of them won’t accept patients “new to Medicare” and I don’t know where they draw the line, especially since it takes a long time to get your first appointment as a new patient .I changed my PCP over a year before applying for Medicare.

Second, my doctor ordered many tests while I was still on employer coverage. Now I can continue to have those tests on Medicare because she is following trends. A lot of blood tests, such as cholesterol are only covered every five years under Medicare, but I am able to get it every year or more frequently. All of my vision tests are covered at my eye doctor under Original Medicare because he was following trends. You have more coverage for eye care under Original Medicare than the Advantage plans lead you to believe. True , you can’t get eyeglasses but people over 65 don’t need new glasses frequently.

Randy Dobkin
Randy Dobkin
2 months ago

An annual lipid panel doesn’t seem excessive to me. Hopefully Medicare will cover it when I’m eligible.

R Quinn
R Quinn
2 months ago

Why did you need a new PCP just because you went on Medicare?

What do you mean following trends? Vision tests are covered only in conjunction with a disease of the eye are they not? Not routine refraction, etc.

Why would you want blood tests more often than needed or beyond medical guidelines?

Kenneth Tobin
Kenneth Tobin
2 months ago

You should retirement planning from the day you have earned income. As a teenager work outside the home and open a Roth IRA-the best investment anyone can make. Tax Free Compounded Profits beats everyone. Put the Roth 100% in to SP500 or Total Stock

DrLefty
DrLefty
2 months ago

I pretty much did all of this wrong. We spent all of our 20s and the early part of our 30s in school, so I was in my mid 30s before I saved a dime for retirement. Fortunately, though, I worked for public universities and will have a pension. We didn’t really start saving in earnest for retirement until we were 45 or so.

On the other hand, I’m an insurance man’s daughter and had an umbrella policy from an early age and bought LTC in our 40s. I just, at 62, canceled my disability policies, realizing that if I became disabled, I’d just retire. And we still have our term life policies—one ends at age 65 and one at 69. If there’s such a thing as being over insured, I’m probably it.

Nick M
Nick M
2 months ago

Economists tend to agree that retirement saving early in life doesn’t make any sense. With little money early in life what you really need is income smoothing, not compound growth potential. Before age 30 people should be paying off their student loans and savings for cars and a home. Probably not a good idea to get financial advice from Fidelity, since there’s a conflict of interest there.

LTC is inappropriate for nearly everybody. It’s not real insurance, which is to say there is unlimited risk even with the insurance. All it does is define a specific benefit amount before you, once again, have to cover the remainder yourself. For the poor, Medicaid is the answer. For the well off who can afford the premiums, they can likely afford to forgo the insurance. LTC is really only useful for a very specific lower-middle income household.

James McGlynn CFA RICP®
James McGlynn CFA RICP®
2 months ago
Reply to  Nick M

LTC insurance discussions always seem black and white. The people who have the licenses to sell the policies and have passed exams aren’t “trusted” since they have a vested interest. Those who don’t believe in the policies don’t have training or licenses and just say “a waste of money”. I blame Genwieth et.al. for underpricing the policies. I would also say late 50’s better to start hybrid ltc policy.

R Quinn
R Quinn
2 months ago
Reply to  Nick M

LTC insurance is also used to protect assets. From experience there is a big difference between monthly premiums and the cost of LTC even outside a facility.

Those economists are likely the same ones who claim you can save too much for retirement on the theory you are denying yourself things by doing so.

At any stage of life saving is essential and if you can’t save something and own a home, you can’t afford a home, not the other way around.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Nick M

Economists may like consumption smoothing, but humans prefer a gradually rising standard of living. The high-end restaurants I visit today wouldn’t seem nearly so special if I hadn’t spent my 20s barely able to afford a takeout pizza on a Friday night.

parkslope
parkslope
2 months ago

I agree but also think there is a middle ground. Single parenthood made it difficult for me to save when I was young, but my later earnings allowed me to comfortably save 20%-25% and also enjoy many “luxuries” that were beyond my means while I was raising my son.

Bob Drake
Bob Drake
2 months ago

Good plan – especially saving early(magic of compounding) – if one starts right away you won’t have to adapt to a cuttback. I am two months away from your last bullet. The only thing I didn’t do was LTC insurance. Important area, but I read too many articles about people whose premiums got unexpectedly jacked up to unaffordable levels via fine print, less coverage than expected(fine print), etc. Because I started saving early I thought I was in decent shape to self insure.

R Quinn
R Quinn
2 months ago

Sound advice, now just trying to get people to exercise the discipline to follow it.

By the way, regarding traditional pensions, most Americans never had a pension. In 1950 about 25 percent of the private sector workforce, had a pension. Ten years later that increased to almost half of the private sector workforce. Today Less than one-third (31%) of Americans are retiring with a defined benefit pension and the majority of them are public employees.

The bottom line is half of America never had a pension. Makes you wonder how retirees got by for all these years. The answer is they died, lived with family or scrapped by with the bare minimum and did little in their retirement years. That’s how my parents and grandparents lived.

M Plate
M Plate
2 months ago

Although sound advice, Fidelity (and the rest) benefit from us making more contributions sooner and longer. Their advice should be evaluated with that in mind.

Everyone should strive to save and invest as early as possible but typically retirement savings hit high gear after age 50. When we are younger, we often have mortgages, dependents, and education expenses to deal with.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  M Plate

What you say is true and there are many things that Fidelity has done over the years that I find questionable, but I don’t think we should fault the firm for encouraging young adults to save.

Rob Jennings
Rob Jennings
2 months ago

Not sure about the advice to wait until you are in you 60s to buy a LTC policy. There are a couple of arguments for buying earlier in your 50s, 1-you want to be in good health so you don’t get denied and 2-you can both start out at a reasonable premium and build up enough policy worth to take the option of not accepting in the inevitable premium increases, assuming that is an option with the policy like it is with ours. As far as the first 3 milestones in this article, I missed all of them-did not start saving for retirement until 35 and did not get umbrella insurance until I was in my 60s-and only did so then because I had retired at 61 (did OK even though I started late…) and am self-employed part time.

R Quinn
R Quinn
2 months ago
Reply to  Rob Jennings

I’m not sure about waiting until 60 to buy LTC insurance either. I bought it as an offering I set up through my employer at age 45 and at that time premiums rose quite a bit at higher ages. Today, the premiums are rising so fast, I’m not sure it’s worth it. 40% increase last year and 27% this November.

Donny Hrubes
Donny Hrubes
1 month ago
Reply to  R Quinn

Yes Sir Richard, getting the correct policy is very important. Mine has level premiums of $3K a year and is with a large, old and stable firm. My estate lawyer stated most people with car and home insurance tend to not want to make a claim, because of the fear of increased premiums. As Dennis stated, many folks, up to 70% will need some type of paid health care in their lives and more apt to use the LTC benefit.

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